Suggested approach

MEMORANDUM

To: Partner From: CARe: ReadQ Inc. - Insurance Claim

I met with Ms. Black of ReadQ and have reviewed the relevant materials. My assessment of the situation is presented below.

Engagement management

We have been engaged by ReadQ to assist the company in preparing a statement of claim for its insurance company because of a fire on September 2. We have also been asked to certify the claim for the insurance company, which the insurance company will use in its evaluation of ReadQ’s claim.

A number of engagement issues need to be sorted out as we proceed with this engagement. It is not clear who the client is for the certification. Are we preparing the certification on behalf of ReadQ or on behalf of the insurance company? We are seeking to help a long-time client maximize their claim within the parameters of the insurance policy. The insurance company is looking for an objective interpretation of the losses suffered by ReadQ. If we accept this engagement, we must be especially careful to approach the work with an independent frame of mind.

In addition to the insurance company, ReadQ’s bank may also be a user of the statement of claim if the insurance company does not pay within 30 days. We need to consider whether there are any implications associated with the bank using the statement of claim. We could restrict distribution of the statement of claim to the insurance company, or we could perform procedures that would be appropriate for the bank’s purpose.

ReadQ has asked that we do this engagement on a contingent fee basis. I do not think that this request is appropriate because this is an assurance engagement and there is a need for objectivity on our part. A contingent fee would, at a minimum, lend the appearance of bias in our approach to the engagement since our economic incentive would be to maximize the amount received by ReadQ.

Assurance

The insurance policy requires that an independent accountant certify the statement of claim. It seems that some form of assurance is required, but it is not clear what is required for certification or whether we can provide the assurance that the insurance company requires. If the insurance company requires a conclusion that the claim is in accordance with the terms of the insurance policy, then it will be an assurance engagement. From the information I have gathered, it does seem that the insurance company wants assurance regarding the contents of the claim.

There are a couple of choices for the type of report we can provide to the insurance company. One possibility is an audit report on compliance with agreements, statutes, and regulations (S. 5815). This report will allow us to audit all the elements of the claim and provide assurance on them. Alternatively, we could discuss the specific requirements with the insurance company and perform the specific procedures it requires (S. 9100). If we are not able to obtain sufficient appropriate audit evidence to evaluate one or more aspects of the claim, we may not be able to provide the assurance required for certification. It is possible that we may have to qualify our report because of scope limitations. For example, it is not yet clear whether the accounting records and invoices were destroyed in the fire. If they were, there may be scope problems.

ReadQ wants the claim to be processed quickly, which limits the amount of time we have in which to do our work. We need to discuss this matter with the client and agree on a reasonable timetable. We should advise the client that a delay is likely with the lost profits portion of the claim because we will have to wait until the end of the year to estimate the amount of lost profits. This delay may cause a problem for ReadQ because of its cash flow concerns. We may be able to assist ReadQ by providing it with payment terms for our fees that suit their cash flow situation.

We should advise ReadQ that it has an obligation to take all reasonable steps necessary to mitigate its losses. That means that the company should not stand by and assume it can do nothing while waiting for its cheque from the insurance company to arrive.

For our planning purposes, it would be prudent to keep the audit and assurance claim engagements separate by assigning different people to each. This will ensure our independence.

Finally, it should be noted that because of the nature of the engagement, everything is material. The amount that ReadQ receives is equal to the amount approved by the insurance company, based on the terms of the insurance policy. Therefore, every dollar is important.

Analysis of insurance claim - revised statement of claim

1. Inventory—books

The amount that ReadQ has included in its initial claim represents 100% of the cost of the books with no allowance for a decline in value. However, industry norms indicate that the saleability of at least some books declines with time, and inventory is written down based on the age of the books on hand. The policy allows ReadQ to recover no more than the lower of net realizable value (NRV) and replacement cost. If NRV falls below cost, then according to the policy NRV should be the amount that ReadQ is compensated. The rationale is that the insured should not be better off as a result of the fire. If ReadQ is reimbursed for the cost of the books when NRV is less than cost, then ReadQ will be better off since it will receive more from the insurance company than it would have from sale of the books. An important question is whether the allowances traditionally used by ReadQ are reasonable estimates of the decline in value. Assuming the allowances noted are appropriate, the amount claimed should be as follows:

Year pri n ted Allowance Total co s t Cost a f ter al lowance taken

Current year 5% $201,200 $191,1401 year prior 10% 40,500 36,4502 years prior 15% 126,710 107,7043 or more years prior 25% 144,440 108,330

$512,850 $443,624

The new printing equipment is supposed to be 10% more efficient than the equipment it replaced, which reduces the cost of replacing the destroyed books. In principle, this should reduce further the amount that ReadQ should recover from the insurance company. If the equipment improves efficiency as claimed, ReadQ will be able to reap the benefits immediately and the replacement costs should be reduced by 10%—ReadQ should receive$461,565 (90% of $512,850) or $399,262 (90% of $443,624), depending on whether the full cost or the cost after taking the allowance is claimed.

Before the payout is determined, however, the claim of a 10% improvement in efficiency needs closer scrutiny. Where does this 10% come from? Has ReadQ found that it enjoys a benefit of this magnitude? Or is this 10% improvement a marketing claim that applies only under ideal conditions? Will ReadQ benefit immediately, or will it take time before the efficiencies are achieved? It is not at all clear that ReadQ will benefit from these efficiencies, and I do not think that the payout to ReadQ can justifiably be based on a possible gain. If the 10% saving is not borne out, ReadQ is significantly out of pocket. I recommend that the 10% increase in efficiency not be factored into the claim. It may be prudent not to emphasize the benefits of these efficiencies when justifying the purchase of the XP750 since the insurance company may use the justification to argue for a reduction in the payment for inventory replacement.

Quantities reported are based on a comparison of physical count to perpetual inventory. We have not tested or relied on the perpetual system in our audits, so there is some question as to the reliability of the information. Our experience has shown no problems in the past. The impact will depend on the type of engagement we do—it may limit the assurance we can give.

2. Profit on lost sales

ReadQ is entitled to recover lost profits caused by the insured event. As a result, profits from permanently lost sales can be recovered. The insurance company may respond that if the inventory is replaced quickly, no sales can be considered lost because ReadQ will be in a position to sell the entire inventory. This interpretation is valid if sales are merely delayed and not lost. In that case there is no loss of profit.

ReadQ’s claim assumes that the profit has been lost on all the inventory that was destroyed or damaged in the fire. This is not a realistic assertion since ReadQ will be able to replace and sell at least some of the books. Making matters worse is the assumption that items that have been in inventory for a long time will suddenly be sold. We will have to determine the amount of time ReadQ is not operating so that we can come up with an estimate of the lost sales. Because some items remain in inventory for some time, ReadQ will be able to replace the inventory and ultimately sell the items.

To estimate the loss we must consider the following:

· the amount of sales permanently lost because the fire will not allow the company to produce all the books it requires to meet demand for the busy Christmas season;

· the impact of the award-winning book;· the permanent loss of sales because some books will become less marketable or

unsaleable—for example, seasonal book sales are lost;· consideration for old stock—similar to the valuation adjustments made for

inventory.Some items will sell at reduced margins or not at all; and

· the requirement to minimize losses through the timely replacement of inventory.

The estimate of a loss of profits is very difficult. Clearly, the ReadQ’s estimate overstates the loss, for the reasons explained above. More information is necessary to make a reasonable estimate.

Cost recovery promotion

The issue appears to be that ReadQ anticipates that it will lose sales as a result of not being able to produce enough books to meet demand—the lost sales being the result of a successful promotion where demand goes unfulfilled. If the insurance company is willing to compensate ReadQ for lost sales and profits, then compensation for the promotion costs is not appropriate. The company is not entitled to the benefits from the lost sales and from the promotion costs since the outcome would make ReadQ better off as a result of the fire, which is not acceptable. I think that ReadQ would be better off recovering lost profits on sales than the lost promotion cost.

The problem is that the effectiveness of the promotion may be hard to substantiate unless there is some precedent that demonstrates its effectiveness. It would be necessary to base the loss on forecasted sales rather than on historical patterns (although the insurance company may find this comparison unacceptable). Certainly the award that one of ReadQ’s books received would enhance the effectiveness of the program.

3. Printing equip m ent

The insurance policy does not make clear what is meant by “replacement cost.” Replacement cost could mean the cost of replacing the destroyed assets with brand new ones or it could mean replacement cost after taking into consideration the age and condition of the destroyed assets. This matter has a definite answer. We must determine what the policy provides for by contacting the insurance company.

The situation is a bit tricky because ReadQ did not acquire equipment identical to that destroyed, as the particular model was no longer available. The model ReadQ did purchase has some features that go beyond what could be considered a reasonable substitute for the destroyed equipment. The insurance company’s obligation is to provide ReadQ with equipment that makes it no worse off than it was before the fire.

At a minimum, ReadQ is entitled to equipment with the same features. The XP550 is the closest in features to the destroyed printer, so that should be what the insurance company should compensate ReadQ for. As a result, the insurance company is unlikely to pay the extra$10,000 for the XP 750. The insurance company could contend that the XP 550 offers more than the destroyed equipment and so the compensation for the loss should be reduced. However, if the XP 550 is the option closest to the destroyed equipment without leaving ReadQ worse off, then the insurance company has an obligation to pay the full amount for the XP 550.

The rush delivery charges should be covered because getting the new equipment in place as quickly as possible should reduce the amount of lost sales, especially in view of the seasonality of the business and the time of year. The insurance company could attempt to argue that rush delivery is not covered. Training costs should be covered, since employees must know how to operate the new equipment and the need for training is a direct result of the fire. The training is also necessary to validate the warranty and so is an integral cost of the equipment. If the training cost for the XP 550 differs from that for the XP 750, the insurance company could argue that the incremental amount should not be covered.

If replacement cost means the cost of replacing the lost equipment with new equipment, then ReadQ should receive $475,000. If replacement cost means depreciated replacement cost, then ReadQ should receive an amount in the neighbourhood of $257,000 (the proportion of the destroyed equipment that had not been amortized ($475,000 x $242,000/$450,000)). I assume that delivery and training are recoverable. The maximum that ReadQ can expect to receive is the full cost of the XP 750. The worst-case scenario is that ReadQ receives$257,000.

4. Building repairs and cleaning

Materials and supplies used in the repair and cleaning of the building are allowable under the insurance policy. However, the policy permits only 50% of the cost of work done by ReadQ’s employees to be claimed. This means that only $12,658.50 ($25,317 x 50%) of the cost of employee labour can be recovered from the insurance policy. Nor does the policy allow for the recovery of overhead costs. The way in which ReadQ has calculated the cost of supervision by foremen as a percentage of labour costs suggests that it is an overhead allocation rather than the actual cost of the foremen. To recover the cost of the foremen, ReadQ will have to show the actual cost of the work they performed. It is also necessary to show that the cost of benefits, which is charged at 20% of the cost of labour, represents the actual cost of the benefits. ReadQ can charge the actual cost of benefits but not overhead costs, so it will be up to ReadQ to support the charge (with our help, if need be).

The insurance policy allows the insurance company to limit payment to “an estimate of the value of work…” On this basis, the insurance company may object to the overtime charge since a third-party provider would not have charged overtime. ReadQ can try to support the overtime charge by arguing that the costs are justifiable because the overtime enabled the company to get operating again as quickly as possible, which served to minimize its losses. With respect to the overtime charges and for all costs incurred, ReadQ’s case will be more supportable if it can show that the in-house charges are comparable to those a third party would have charged.

GST should not be included in the claim because of the availability of the input tax credit.

Based on the terms of the insurance policy, ReadQ’s claim will be reduced by at least 50% ofthe cost of labour. The worst-case scenario is that the insurance company will also try to exclude the overtime charges, benefit costs, and the cost of the foremen. The revised claim for building repairs and cleaning is:

Best case Worst case

Materials $ 23,435 $23,435Labour

Basic 5,751 5,751Overtime 3,600 0Benefits 1,870 0Foreman 1,437 0

Supplies 2,500 2,500GST 0 0

Total $ 38,593 $31,686

5. Warehouse fixtures

The insurance company should be willing to pay for the destroyed warehouse fixtures since they appear to be explicitly covered by the policy. The question is how much should be paid. As was the case with printing equipment, we need clarification on the definition of replacement cost—is it new or depreciated? If it is replacement cost new, ReadQ will receive$134,000. Otherwise, it will receive $75,040, which is 56% of the replacement cost new, the proportion of the fixtures that is unamortized (1-55,000/125,000). The information gathered from ReadQ makes no mention of the cost of installing the new fixtures. This amount may be included in the replacement cost or may have been ignored. ReadQ should be entitled to 100% reimbursement of these costs regardless of the definition of replacement cost.

6. Inventory— m aterials

Paper costs have declined 5%; therefore, replacement cost will be $3,635 ($72,700 x 0.05) less than reported in the inventory listing. ReadQ also receives a volume discount at the end of the year from its supplier. Whether the insurance company is entitled to the discount is debatable. It could be argued that the insurance company is entitled to the volume discount only to the extent that the replacement paper itself exceeds the volume required. Alternatively, it could be argued that the discount should be averaged over all purchases during the year. I suggest we use the former approach since it is beneficial to ReadQ and is defensible. I think the worst case is that the discount would have to be shared proportionately. The claim for inventory materials should be $112,350.

7. Display books

If the display books are considered inventory, ReadQ is unlikely to recover the $15,000 cost of cleaning the books unless it had special insurance coverage for them. If there is no special insurance, the insurance coverage is limited to the lower of replacement cost and net realizable value. The average cost of producing books in the current year according to the

information provided is $7.50 per book. To replace the 150 damaged books would cost $1,125 ($7.50 x 150).

As an alternative, it might be possible to argue that the display books are capital assets, not inventory. The display books are not available for sale and therefore should not be classified as inventory. The books are used in ReadQ’s offices, much as art or furniture would be. Art and furniture would be classified as capital assets. If the display books are considered capital assets, then the repair costs would be allowable.

In my view it is not very likely that the insurance company will allow the books to be classified as capital assets, but it is certainly worth the try.

8. Other costs

ReadQ has included a charge for interest in its statement of claim. We have to determine whether interest is covered by the policy. If interest is allowed by the policy, the interest claim should be the actual out-of-pocket cost incurred. The amount that ReadQ has included in the statement of claim for interest is based on the total amount of the claim from the date of the fire on September 2. This figure is not realistic since many costs were incurred after that date. To calculate the appropriate amount of interest we will have to determine when actual payments were made, such as the cost of repairing the building, etc. It does not appear appropriate to charge interest on certain costs because they do not represent out-of-pocket expenditures. These include the inventory replacement cost and lost profit.

A first cut at this estimate would be to include the following costs for a period of one month: building repairs and cleaning, printing equipment, fixtures, inventory material, and display books. This would make the interest cost $7,711 ($771,068 x 1%). An exact calculation will require that we look at the actual dates of payments.

We should also determine whether our fees can be included as part of the claim.

9. Sum m ary

Below is a summary of the revised claim. Additional revisions may be required pending the receipt of additional information. Also, it was not possible to estimate lost profits at this time.

Origin a l cl ai m Revised claim

1. Building repairs and cleaning $ 53,067 $ 38,5932. Printing equipment 485,000 485,0003. Warehouse fixtures 134,000 134,0004. Inventory - books 512,850 443,6245. Inventory - material 115,985 112,350

6. Display books 15,000 15,0007. Promotional costs 7,500 08. Profit on “lost” sales 512,850 ?9. Interest 36,725 18,177

Total claim $1,872,391 $1,246,744

Preliminary outline of work

Below is a preliminary list of work that needs to be done on the engagement:

1. Review of insurance policy

Do we require help with interpreting the policy or help with the forensic accounting work? The insurance company will probably hire an expert to assist it in interpreting the claim. The policy must be read to ensure that we understand its terms so that we can calculate the claim properly.

2. Building repairs and cleaning

Materials—examine invoices—ensure the materials used in repair and cleaning were related to fire damage. Labour—examine time sheets and verify payroll burden rate, overtime premium; determine how supervision costs and benefits were arrived at (were they overhead or actual costs?).

3. Printing equip m ent

Examine invoices, inspect equipment, and review specifications of equipment. We may have to perform work to ensure there was no alternative to purchasing the upgraded equipment.

4. Inventory – books

Did the insurance company do an inspection at time of fire? If so, we should examine the inspection report.

The quantities in the insurance claim are based on a comparison of the physical inventory count to the perpetual records. However, we have not tested or relied on the perpetual system. Can we reconcile changes since the year-end physical count from shipping and production records (inventory roll forward)? We could also vouch purchases of materials and estimate sales since the physical count. We should also inspect the remains of the inventory after the fire to determine its condition and whether any of what remains is salvageable and saleable.

The fact that we did not rely on the perpetual inventory system may create problems with regard to providing assurance on the inventory since it may be difficult to determine the amount of inventory that was on hand at the time of the fire.

5. Inventory – m aterials

It may be difficult to verify quantities because likely difficult to estimate usage. Vouch purchases; estimate usage since the physical count.

6. Display books

Verifying costs is not a problem—vouch to invoice—provided that the invoices are available and not destroyed in the fire. It may be difficult to determine appropriate coverage.

7. Pro m otional costs

Verifying costs is not a problem—vouch to invoice—it may be difficult to determine appropriate coverage.

8. Other costs

Interest costs - Verifying the calculations is straightforward. We need to determine whether an overdraft was created by these payments or whether interest was actually incurred.

Other items

Tax issues

· Replacement property rules for capital assets—tax consequences can be avoided.· Reimbursement of costs is taxable (interest, other out of pocket costs).· Lost profit is taxable.· Lost inventory is deductible, but the proceeds for replacing it are taxable.

Storage of first edition books

We should suggest that ReadQ investigate special insurance coverage for the original books and that it store these books in a secure place.

Cash flow issues

The client has noted its tight cash flow at this time of the year. Discussions should be held with the bank immediately to ensure that interim financing is available until the insurance company pays the claim. Discussions with suppliers should also be held so that they are aware of the situation and will continue to offer credit to ReadQ in the event of payment delays. ReadQ could use the money used to replace the equipment for operating purposes and finance the replacement equipment on a long-term basis.

Notification of claim

We should confirm that ReadQ has filed with the insurance company written notice of the fire and the pending claim.

Marking key

IMPORTANT NOTICETo understand how to interpret the marking key properly, it is imperative that readers refer to:- Introduction to Suggested Approaches and Marking Keys and,- The suggested approaches to questions.

A. OVERVIEW-ENGAGEMENT MANAGEMENT

% of candidates

Mark awarded value mark

1. Certification will be used by insurance company 1 712. Bank is also a potential user of the report/claim 1 493. - limit the distribution of report – not for bank’s use 1 114. - or perform the procedures necessary for the bank’s purpose

if required 1 15. Candidate recognizes conflict between insurance co. and ReadQ 2 396. Are we independent (in context of insurance policy) – can we 2 20

accept engagement7. - if we can accept engagement, must be sensitive to independence 1 1

because of conflict/bias8. Contingent fees are not appropriate because of the need for

objectivity 1 85Discussion of the nature of assurance being provided9. This is an assurance engagement that claim is in accordance with 1 37

terms of insurance policy10. - discuss type of report that should be provided (S.5815) 1 2111. Insurance company wants assurance regarding the claim’s contents 1 112. - alternatively we could discuss with the insurance company and 1 24

perform specific procedures they require (S.9100)13. If we cannot obtain suff. evidence to evaluate aspects of the claim, 1 2

we may not be able to obtain the assurance required (context of fire)14. - potential qualification (scope limitation) 1 315. - are invoices/records available – did they burn 1 416. The client expects the claim to be processed by Oct. 31 (timing

of work) 1 3817. - maybe a delay in preparing the lost profits portion of the claim 2 118. ReadQ responsible for mitigating their damages 1 219. Auditors should be different people than those handling claim – 1 2

independent20. Discussion of materiality – everything is material 1 37A. AVAILABLE 23/MAXIMUM 23

66½ 58

½ 7

½ 20½ 35½ 18

0 11½ 20

1 91 2

63

1 511 411 5

1 27

1 41

½ 43½ 1½ 1

0 420 292 21 10

1 81

1 2

B.ANALYSIS OF INSURANCE C L AIM - REVISED S T ATEMENT OF CLAIM

Building repairs and cleaning21. Labour performed by the insured must be decreased by 50% – cal22. Employee benefits/foreman can be interpreted as overhead23. - have to substantiate employee benefits to show that 20% is

actual cost24. - have to substantiate that foreman actually was involved in the

work25. Overtime charge may not be permitted/be disputed26. - can support overtime costs as necessary to get company

operating again at a crucial time27. Compare cost of 3rd party with in-house charge28. GST should not be included - input tax creditPrinting equipment29. Does replacement cost mean used or new?30. Impact of replacement cost used31. Insurance company should provide comparable equipment – shoul

agree to equipment that comes closest to what it had – no other viable option

32. XP 550 is the appropriate replacement equipment (closest)33. Insurance co. not willing to pay extra $10,000 for the 75034. Insurance co. may argue some reduction required for extra

features (550 vs XT 100)35. Rush delivery charges can be supported based on minimizing lost

sales opportunities (time of year, seasonal nature of business)36. Training costs should be covered as they are integral to

equipment (warranty)Warehouse fixtures37. Insurance company should be willing to pay for replacing the

fixtures38. Discussion - definition of replacement cost39. Candidate considers installation costs – included?Inventory books40. Initial claim is 100% of cost of books/no allowance for decline

in value41. Saleability/NRV of books declines over time42. ReadQ should not be made better off by insurance claim43. Are last year’s allowances actually used/still valid?44. - calc. of amount that should be claimed using allowances per the

audit file45. New equipment is 10% more efficient – affects replacement cost

of books

Uniform F i n al Exam i n a ti o n Repo r t 2 001 210

46. New equipment should reduce costs by 10% then replacement 1 1inventory $461,565 (90% of $512,850) or $399,262 (90% of $443,624)

47. Discussion of whether this saving to the insurance company on 2 1expenses should be used to cover the extra cost of the cost saving equipment

Uniform Final Examination Report 2001 211

Inventory materials48. Paper costs have declined 5% therefore replacement cost will be less ½ 71

than previous cost and claim should be reduced49. Impact of volume discount/rebate—reduces cost of replacing

inventory ½ 3350. Should insurance co. or ReadQ benefit from discounts?—discuss ½ 1Display books51. Display books could be inventory – use RC/NRV ½ 452. Calculate effect of reducing to replacement cost ½ 153. Discussion of whether display books are capital assets ½ 1654. - would allow claim of repair costs ½ 14Profit on lost sales55. Profits for permanently forgone sales only can be recovered 2 156. The insurance co. may argue no lost profit - inventory 1 3

will be replaced and sold57. ReadQ assumed that profit has been lost on all lost inventory 1 25

(this is not realistic/very aggressive)58. Need to determine amount of time that ReadQ is not operating at 1 6

normal levels to get an idea of sales that might be lost Factors affecting ReadQ’s claim59. - peak sales season/operating at capacity so loss of production 0 23

time means permanent losses60. - the impact of award winning book on sales 1 3061. - loss of time may render some books less marketable (seasonal

books, eg.) 1 162. - reduction for old stock 1 4263. - requirement to min. losses through the timely replacement of stock 1 1Promotion costs64. - may be hard to defend (precedent for effectiveness of the program) ½ 165. - must be based on forecasted sales rather than historical patterns 1 166. - promotion costs are not caused by insured event, therefore ½ 25

cannot be reimbursed67. Calculation of potential adjustment of claim 1 35Other costs68. Are interest costs covered by the policy? ½ 3669. Base interest charge on interest incurred on actual out of pocket

costs ½ 270. Claim is based on amounts being paid and the overdraft ½ 1

created September 2, the date of the fire, this is not realistic71. If covered - look at payment dates for items (repairs, cleaning,

equipment) ½ 172. No interest on inventory and lost profit (not out of pocket) ½ 1

Uniform F i n al Exam i n a ti o n Repo r t 2 001 2 12

73. Consider if our fees in assist. with the claim can be included asa cost item 1 4

1 64

½ 20½ 4

½ 28½ 31½ 37

½ 36

½ 1½ 44

½ 29½ 8½ 29

½ 51

1 31 1

storage 1 1

1 191 1

and 1 1

1 24

2 18

Uniform Final Examination Report 2001 213

Conclusion74. Overall recalculation of claimB. AVAILABLE 41/MAXIMUM 15

C. PRELIMINARY OUTLINE OF WORK75. Examine copy of insurance policy – with reason76. - do we have expertise – may require assistance of lawyer/

insurance expert/forensic accountant77. Building repairs and cleaning – materials: examine

invoices, inspect work78. Labour – examine time sheets, check rates79. Equipment/fixtures – examine invoices/inspect

equipment/review equipment specs80. - ensure there was no alternative to purchasing the upgraded

equipment/fixtures81. Examine any insurance inspection reports82. Quantities based on a comparison of physical count to perpetual

inventory – we have not tested or relied on perpetual system83. - we also need to verify inventory post-fire (procedure)84. Impact - may limit assurance we can give85. Can we reconcile changes since year end physical count

– inventory roll forward86. - vouch purchases, estimate sales since physical count87. Promotional costs – verifying costs not a problem: vouch to invoiC. AVAILABLE 6½/MAXIMUM 6½

D. OTHER ITEMS88. Replacement property rules for capital assets – tax consequences

avoided89. Discussion of tax treatment of proceeds90. Special insurance coverage/consider more secure/fire proof

in future91. Discuss with bank financing available until insurance claim is

settled92. Discuss with suppliers that they will continue supplying credit93. Use proceeds from capital assets to fund immediate cash

needs finance replacement equipment94. Has client filed written notice with insurance companyD. AVAILABLE 7/MAXIMUM 7

E. PROFESSIONAL CAPABILITIES:95. Addressed nature of assurance to be provided (in context

of users’ needs)

Uniform F i n al Exam i n a ti o n Repo r t 2 001 214

96. Analyzed insurance claim components (emphasis on large items) 2 2897. Recognize insurance company’s position and provide responses 2 50E. AVAILABLE 6/MAXIMUM 6

0 72

2 57

60

3 40

Uniform F i n al Exam i n a ti o n Repo r t 2 001 215

F. OVERALL EVALUATIONA marginally passing candidate must:98. - analyze major components of the statement of claim (printing

equipment, books inventory, profit loss) and;99. - address the nature of the engagement (contingent fees,

independence, nature of report)The candidate’s response:100.Did not meet or barely met the Board’s expectations and overall

t paper was weak101.Clearly met, or barely met the Board’s expectations, and overall

the paper was adequateF. AVAILABLE 5/MAXIMUM 5

AVAILABLE 62½/MAXIMUM

Uniform F i n al Exam i n a ti o n Repo r t 216